In some couples, one partner handles the majority of the proverbial heavy lifting when it comes to financial matters, in particular if he or she is the primary breadwinner or is in a more advantageous economic position. The other might have limited information about the family's overall financial situation as far as net worth, taxes and income go, and just signed tax returns prepared by their spouse or a third party when asked.
So long as those tax returns were correct, all income and property was declared, and the statements made within them were true, there isn't really anything wrong with that kind of financial management system within a marriage. After all, we all have our own individual interests, strengths and weaknesses.
However, if the person responsible for the payment of taxes and filing of returns has been purposely deceitful or negligently failed to properly handle tax issues, both spouses could potentially be in trouble. The IRS is known for its dogged pursuit of back taxes and unreported income; they're like the Mounties in that they "always get their man" (or woman). If you've received notification that your past joint tax returns are being audited, or that you are now facing overdue back taxes because of nonpayment or underpayment of taxes, you could potentially be facing repayment of those amounts as well as interest, penalties or even criminal charges.
The IRS does recognize that, in some situations, one spouse genuinely had no idea that any deceit (malicious or otherwise), failure to pay, failure to file or failure to declare assets was occurring. That is why they recognize something known as "innocent spouse" relief.
What is innocent spouse relief?
Like the name implies, this type of relief from tax collection efforts and penalties is potentially available to you if you are a spouse who:
- Filed a tax return containing an understatement of tax due to an "erroneous item" provided by your spouse ("erroneous items" are defined as unreported income or incorrect deductions, credits or basis applications)
- Can establish that, at the time you signed the return, you had no knowledge of any understatements of tax due on the return, nor did you have any reason to know there were erroneous items
- When all circumstances are considered, it would be unfair to hold you liable for the understatement of tax
- You and your spouse have not participated in what is known as a "fraudulent scheme" by transferring property from one to the other in an attempt to defraud the IRS, other taxation authorities, creditors, former spouses, business partners or others
It is important to note that you may be eligible for partial innocent spouse relief if you had some knowledge of an erroneous item but not all the facts surrounding the underpayment of tax. For example, let's say that your spouse told you that he or she didn't declare the existence of an offshore account in the amount of $10,000. In reality, there were several accounts worth a total of $100,000. It might be possible that you could still be eligible for relief as regarding non-payment of taxes on the additional $90,000 of which you were unaware. Since you did have actual knowledge of the underlying $10,000, however, you would not be considered an "innocent spouse" in regards to that.
Seeking innocent spouse relief
Innocent spouse relief is requested by filing Form 8857 with the IRS. After providing information about the circumstances of the underpayment of tax, including any erroneous items on past tax returns, the agency will decide if you are eligible for relief and to what extent.
The ability to secure innocent spouse status could literally be the difference between a bright financial future and economic disaster. If you are considering filing for innocent spouse relief, don't do so without first discussing your situation with an experienced taxation attorney in your area. One misstep throughout the process could make all the difference, and you may inadvertently expose yourself to financial liability unless you tread very carefully.